Question #11

Reading: Reading 23 Residual Income Valuation

PDF File: Reading 23 Residual Income Valuation.pdf

Page: 6

Status: Incorrect

Correct Answer: A

Your Answer: C

Part of Context Group: Q11-12 First in Group
Shared Context
- Calculate the intrinsic value of the company using a residual income model, assuming that after four years, Silo's residual income will remain constant forever. A) $8.8. B) $11.4. C) $10.7.
Question
Regarding Oliver Chippy's comments on persistence factors: Comment 1 Comment 2
Answer Choices:
A. Incorrect Correct
B. Incorrect Incorrect
C. Correct Incorrect
Explanation
The projected rate at which residual income is expected to fade over the life cycle of the firm is captured by the persistence factor, which is between zero and one. Higher persistence factors will be associated with low dividend payouts (high reinvestment) and historically high residual income persistence in the industry.
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